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“It is better to have less thunder in the mouth and more lightning in the hand.”
–Apache Proverb
Keith and Howard are flying to Western Canada this morning to meet me for meetings in Calgary and Vancouver, so I’ve been handed the duty of writing the Early Look this morning.  Over the course of the past week, I’ve spent a good deal of time in proximity to Native Americans. I’ve been down in Phoenix, Arizona, which is of course a bastion of Native arts and culture, and have visited my hometown of Bassano, Alberta, which borders the Siksika Nation, a Blackfoot Reservation in Southern Alberta.
The indigenous populations of North America are a proud and storied people.  Their traditions and culture have survived and thrived despite many hardships over the past few centuries.  Geronimo is perhaps one of the most well known Native Americans.  He was an Apache military leader, medicine man and the last Native to surrender to U.S. Army forces at Skeleton Canyon, Arizona on September 4th, 1886.

Geronimo was known for his bravery and fought both American and Mexico troops for over 26 years until his capture.  He lived until 1909 when, at the age of 80, he died after being bucked off a horse. Since his death, Geronimo has been given many honors, including having three towns named after him. Most notably though was the attribution of the slogan and motto of the 501st Parachute Infantry Regiment, the first airborne unit in the United States military, after him, hence the use of “Geronimo!” when leaping from high heights.  An expression that could also be used to describe a chart of the U.S. dollar . . . Geronimo!
The global macro news event of the day yesterday was, of course, Chairman Bernanke’s comments at the Economic Club of New York. The Chairman’s prepared remarks were somewhat predictable and defended the need for an emergency level of interest rates well into 2010, but one comment from the Q&A session in particular caught our eyes.  When asked whether he saw any misalignments developing in the U.S. economy (i.e. bubbles), Chairman Bernanke stated:
"It's extraordinarily difficult to tell, but it's not obvious to me ... that there are any large misalignments currently in the U.S. financial system."

The good Chairman likely has a different process than us lowly hockey heads at Research Edge, but one simple thing we do every morning is review market prices across asset classes and geographies.  Thinking about Bernanke’s comment above had me wondering if the asset class moves below could, perhaps, be classified as “misalignments”.

  1. The year-to-date performance of oil is +73%
  2. The year-to-date performance in copper is +124%
  3. The year-to-date performance of gold is +29%

These commodities have one thing in common, they are priced in U.S. dollars. On the margin, fundamentals may have improved for gold, copper, and oil year-to-date, although some would debate that point, but fundamentals certainly haven’t improved in line with the price performances.  While we smell a bubble, Chairman Bernanke sees no “misalignments”.  In honor of our difference of opinion, and as a tribute to our Native American friends, we have given the Chairman a Native nickname, “He Who Sees No Bubbles.”
From an investment perspective, the fact that Bernanke sees no “misalignments”, despite the massive move in some of the commodity markets outlined above, is supportive of an investment thesis that continues to see these global commodities priced in U.S. dollars inflate.  If I were able to read Chief Bernanke’s totem, he seems to be signaling that a continued weak and weakening dollar is not a bad thing, nor leading to any bubbles. So invest accordingly!
A couple of other quotes from "He Who See No Bubble’s" speech that provide a juxtaposition of what is happening economically in the United States are outlined below:
1. “In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty.”
2. “However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses.”
In the longer term, credit will have to start flowing again for households and small businesses for GDP growth to sustain.  While the Bankers, Debtors and Politicians are getting paid, the facts remain.  Small businesses comprise almost 50% of American GDP. A sustainable stimulus will have to reach households and small businesses and not just with “thunder in the mouth”, but also “lightning in the hand.”
Keep your head up and stick on the ice,
Daryl G. Jones
Managing Director


FXE – CurrencyShares Euro TrustWe bought the Euro on 11/12 on a down move against our short position in the British Pound. A bullish formation in the Euro remains and we think the ECB could hike before the Fed does.

XLU – SPDR Utilities We bought low beta Utilities on discount on 10/20. TRADE and TREND bullish.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   

CYB – WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

EWY – iShares South Korea South Korea has joined Japan in the ominous position of broken TREND and TRADE. This is not China or Taiwan. This is an early cycle economy that we want to be short against China/Taiwan.

XLI – SPDR Industrials We shorted Industrials again on 11/9 on the up move as the US market made a lower-high.  This is the best way for us to be short the hope of a V-shaped recovery.   

EWU – iShares UK Despite areas of improvement, broader fundamentals remain shaky in the UK: government debt continues to expand, leadership in critical positions lacks, and the country’s leverage to the banking sector remains glaringly negative.  Q3 saw its GDP contract by -0.4%. Further bank stimulus and the BOE’s increase in its bond purchasing program suggest that this will not end well.

XLY – SPDR Consumer Discretionary We shorted Howard Penney’s view on Consumer Discretionary stocks on 10/30. TRADE and TREND bullish.  

FXB – CurrencyShares British Pound Sterling The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16 and 11/16.

SHY – iShares 1-3 Year Treasury Bonds
 If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.